Pyramid unfolded : Trek Alliance, spin-off of Equinox International formed by ex Equinox leaders

Trek Alliance - VitaminesPhoto by .v1ctor Casale.

Trek Alliance was born out of the demise of another illegal pyramid scheme called Equinox International. Equinox ran from 1991 to 2000, when the company agreed to liquidate assets of $40 million to settle charges by the FTC. In late 2002, the FTC charged that Trek Alliance was a pyramid scheme patterned after Equinox, which had many of the same investors, headed by Bill Gouldd.

Trek Alliance was a spin-off of Equinox International formed by former Equinox leaders incorporated in September of 1997.

Equinox International

In 1996, Bill Gouldd was looking all but invincible. His Equinox International, a multilevel-marketing company based in Las Vegas, was growing at a pace that must have rattled the timbers at Amway, the ubiquitous industry leader. Gouldd may have had a mystical side to his personality, but he also had an undeniable knack for driving his company’s sales.

Since the company opened, in 1991, the network of distributors who sold Equinox water filters, vitamins, and other products had swelled to 100,000 people nationwide and in Mexico. Many of Gouldd’s troops were shelling out as much as $2,500 to attend his high-voltage training conferences. As Equinox completed its fifth year, the company was reporting soaring revenues of $195 million. Its staggering growth rate for the five-year period totaled 35,625%, landing Equinox at the #1 spot on the 1996 Inc. 500 list.

A 10-month investigation by the Federal Trade Commission culminated in a trial that began six months ago in federal district court, in which prosecutors accused Gouldd of operating a fraudulent “pyramid” scheme. As part of the settlement, Gouldd, who never admitted to any wrongdoing, agreed to close Equinox permanently and refrain from working in the multilevel-marketing industry again. The settlement also called for liquidating an estimated $40 million in assets from Equinox and two of its sister companies and from Gouldd himself, with the proceeds earmarked for former Equinox distributors.

Gouldd suspended all 20 distributors three weeks later, and 19 of them signed on with Trek Alliance, which is headquartered in Incline Village, Nevada. The departure of those top producers battered Equinox because, as Gouldd told Inc. in a recent interview, “when players break off a team and ruin the unification of the team, everyone loses.” The company’s revenues, which had already plummeted from $135 million in 1996 to $78 million in 1997, fell again in 1998, to $47 million.

In August 1999 the FTC and eight states took the matter to US District Court of Las Vegas, who ordered a freeze on Equinox’s assets and appointed a court receiver. The central charge was that Equinox was operating a pyramid scheme, meaning that it was selling distributors the right to recruit other distributors and rewarding them in ways unrelated to the sale of products to the ultimate users. The trial began on April 3; Gouldd settled 17 days later.

That settlement erased the last vestiges of Gouldd’s footprint in the world of multilevel marketing, but it hardly left him destitute, according to court documents. He wound up with almost $10 million in assets, including one Rolex, a Range Rover, two houses in Florida, and a cool $8 million in cash.

The Trek Alliance

A settlement in December 2005 finally banned the defendants from engaging in multi-level marketing and required $1.5 million in consumer redress. Distributors at the company ran deceptive job ads promising salaried positions to lure in new recruits. The FTC claimed the vast majority of consumers made less money than they put in, and compensation was not linked to retail sales.

The settlement report stated that The Federal Trade Commission has settled charges against three corporations and their owners and officers that the defendants used deceptive practices to promote their multilevel-marketing program and were operating an illegal pyramid scheme. The Commission will receive about $1.5 million in consumer redress as part of the settlement. Three of the defendants, who had been top distributors for Equinox International, a multilevel-marketing firm sued by the FTC in 1999, are permanently banned from the multilevel-marketing industry.

The defendants – Trek Alliance, Inc.; J. Kale Flagg; Richard and Tiffani Von Alvensleben; Harry Flagg; Trek Education Corporation; and VonFlagg Corporation – are a multi-level marketing company, its owners and officers, its training arm, and its parent corporation.

The orders against Kale Flagg, the Von Alvenslebens, and the corporations permanently ban them from multilevel-marketing. In addition, Kale Flagg is ordered to pay $360,000 and the Von Alvenslebens to pay $515,000. Harry Flagg – who, unlike the other individual defendants, had not previously been involved in multilevel-marketing – is not subject to a ban, but is prohibited from participating in illegal pyramid schemes and is required to pay $20,000. The orders for all of the defendants also prohibit the violations alleged in the Commission’s complaint. Additionally, as part of the settlement, the defendants have authorized their insurance company to pay $600,000 to the FTC to be used as consumer redress. The payment settles a claim against a Directors & Officers liability policy issued to the defendants.

The FTC charged that Trek’s earnings claims, as well as its claims implying that employment opportunities were available, were false. The FTC also charged that the defendants deceptively failed to disclose that most investors would not make substantial income. Finally, the FTC alleged that the program is a pyramid scheme and most participants lose money. The practices violate federal law, the complaint says. The FTC has asked the court to permanently enjoin the defendants’ deceptive practices and to order consumer redress as final relief in the matter.

The FTC case proceedings and time line can be found here.

Photo by .v1ctor Casale.

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